How the Interest Rate Hikes Are Really Impacting Investors – Part 1

Yeah, another article on interest rates. But this one is different, I promise.

We’re all probably getting a bit tired of seeing headlines about how the rate hike is going to impact the market – I’ve seen some people claim it’s going to knock over 40% off the value of homes. The reality is, rates go up and rates go down and have for decades and smart investors look at the actual numbers with a long-term perspective. Day-to-day headlines aren’t (or at least shouldn’t) going to sway their investment strategy and goals.

In this four-part series, I will break down how investors can and should look at the interest rate hikes and how it affects them. I will show you that you need to take a deeper look at how the rate change affects you and how you can’t just compare a 2.75% rate 6 months ago to a 4.75% rate today. Smart investors know that they’re not really paying 2% more and over the next couple weeks I’ll show you how.

But if you’re like a kid at Christmas and just can’t wait, you can book a 30-minute investor strategy call here and I’ll break it all down for you at once.

So let’s look at the first and most ways that changing interest rates will affect investors.

#1 Cashflow

You mortgage payment is just one element of your cost of business and rising interest rates obviously have a direct impact on your cost. Like any business, real estate investing depends on you keeping your costs down and a good mortgage advisor who specializes in investment properties is key.

Let’s look at an example of how average interest rates now have impacted the cashflow on a triplex purchase, compared to interest rates earlier in the year. It’s important to remember that I tell my clients that interest rates are a lot like car insurance – there are a number of factors that influence an interest rate (borrower credit, down payment, property location, property type, portfolio size, rental income etc) and not everyone will get the same interest rate for the same property. So for this example we’re using average “A Lender” rates.

August 2022

• Property price – $750,000
• Down payment – $150,000
• Mortgage amount – $600,000
• Mortgage interest rate – 4.5%
• Mortgage payment – $3,025.29 (30-year amortization)
• Rental income – $4,050
• Property taxes – $320
• Repairs/maintenance – $150
• Vacancy – $110
• Total cashflow = $444.71

February 2022

• Property price – $750,000
• Down payment – $150,000
• Mortgage amount – $600,000
• Mortgage interest – 3.0%
• Mortgage payment – $2,523.62 (30-year amortization)
• Rental income – $4,050
• Property taxes – $320
• Repairs/maintenance – $150
• Vacancy – $110
• Total cashflow = $946.38

That is a very significant difference – $946.38 monthly cashflow on a purchase six months previously compared to $444.71.

However, there’s always more going on with the real estate market. For those who were putting in offers know that the lower interest rates wouldn’t have let the triplex sell for $750,000. That leads us to the second way interest rates impact investors and we’ll break that down next week.